He had feared for his life in the past, but Juliano Mer-Khamis foresaw no danger when he carried his one-year-old son, Jay, to his old red Citroën for the drive home from the theatre he had founded in the West Bank city of Jenin.

With his son on his lap and the nanny in the passenger seat, he pulled out and then braked when he heard his name called. Bullets smashed through the car window and Mer-Khamis moved his foot off the brake. The car moved slowly forward past a United Nations depot and a pool hall before scraping to a halt against a wall. The boy was untouched; the nanny suffered a cut to her hand. But Mer-Khamis was hit by seven bullets and died shortly afterwards.

The Palestinian police announced on Wednesday that they had arrested a member of Hamas for Monday's murder.

Last week, as friends and supporters of the Freedom Theatre in Jenin, which Mer-Khamis ran, struggled to comprehend his death, mourners buried the 52-year-old actor next to his Jewish mother, Arna Mer, in a kibbutz in the north of Israel. Memorial meetings were held in Jenin and Haifa for a man who described himself as "100% Palestinian and 100% Jewish".

"He was aware of the danger and, although he joked about it, he was sometimes afraid," said his partner, Jenny Nyman, who is pregnant with twins. "But he always said that he would rather die on his feet than live on his knees."

In Haifa, friends gathered at the Al-Midan Theatre, a state-funded Jewish-Arab theatre, where they delivered eulogies in Arabic and Hebrew to Mer-Khamis, who first appeared on film in the 1984 movie of John le Carré's The Little Drummer Girl alongside Diane Keaton. He later became a major figure in Israeli cinema and theatre.

But it will be for his efforts at the Freedom Theatre that Mer-Khamis will be mainly remembered. A project that grew out of his desire to offer artistic freedom to the youth of Jenin, it was also the resurrection of his mother's theatre, a West Bank drama group to which she devoted much of her life. In her dying months, Mer-Khamis made a film, Arna's Children, about her and her theatre – but in 2002, the building was destroyed during the second intifada.

In 2006, with the help of Zakaria Zubeidi, a former Al-Aqsa Martyrs Brigade leader who had renounced violence and was given amnesty by Israel, Mer-Khamis reopened it. Speaking to the Observer last week, Nyman recalled the many difficulties Mer-Khamis had encountered in doing so. "People voiced their concerns, often politely but sometimes with firebombs," she said.

The theatre once staged an adaptation of George Orwell's Animal Farm, which was perceived to label the Palestinian leadership as collaborators; the building was later petrol bombed. "We had support from sheikhs who led prayers on stage, but there is no doubt that, in an oppressed society like Jenin, there are always people that are afraid of change," Nyman added.

The Freedom Theatre brought change in all sorts of ways. Mer-Khamis found that encouraging girls to take part in productions was no easy task. "We had no problem attracting boys to the theatre," said Nyman. "But girls were more difficult. We worked hard to make it acceptable. We visited families, invited them to the theatre and we got their consent."

Mer-Khamis, whose parents' union – that of a Jewish woman with a Christian Arab man – symbolised their vision for the people of Israel and the Arab states, soon became a fixture in Jenin. "When we came in 2006 we were afraid, but we have had no problems for years. The theatre has become part of the society. Not fully accepted, but nothing is ever fully accepted here," said Jonatan Stanczak, one of the founders of the theatre.

Last week an old woman, sitting in the street metres from where Mer-Khamis was shot, kissed the tips of her fingers to emphasise her love for him. "He was wonderful, wonderful," she said. As she spoke, a sombre procession of mourners, carrying portraits, flowers and Palestinian flags, walked from the centre of Jenin to its refugee camp and theatre. The residents of the camp watched the group of around 60 mourners without disrespect but with no great interest, either.

Supporters in Israel and the West Bank are determined that Mer-Khamis's dream should continue. Colleagues hope to stage an international theatre festival to allow supporters from around the world to show their appreciation.

Nyman is looking to the future. "Jay knows that something is wrong. I'm glad that he won't consciously remember what happened. Now I must take care of our son and give birth to our children and get us on the right track," she said.

"I'll probably never live in Jenin again, but I feel very strongly that his work has to be carried on. I would hate for his death to have been for nothing."